The Advantages and Disadvantages of Revocable Living Trusts

Have you ever wondered by people decide to get revocable living trusts? DuBois Cary Law Group spells out the pros and cons for you:

Advantages

  • Avoids Probate: When your assets don’t go through probate, they pass more quickly to your heirs and beneficiaries and they are not diminished by the costs of probate.
  • Flexibility: A living trust is flexible in that it can and should be changed to meet any changing circumstances in your life.
  • Estate Tax Reduction: Estate tax savings may be available for married couples by taking full advantage of each spouse’s unified tax credit in the living trust. This option is also available in a Will.
  • Privacy: A major advantage of a living trust is that the details of the trust remain completely private. Neither the assets nor the beneficiaries become a matter of public record. The only people beside you who should know the details of your trust are the trustees and the beneficiaries.
  • Control: Perhaps the most appealing aspect of a trust is that you have complete control over managing your assets while you are still alive. You can manage them yourself or hire others to manage them on your behalf. In a living trust, your instructions govern how your assets are managed, whereas in a will, the courts may impose restrictions on how your personal representative (also called an executor) manages and distributes your assets.
  • Orderliness: With the majority of your assets in one location, your trust, your family may have an easier time locating and identifying your assets after your death.
  • Contestability: It is harder for a disgruntled heir to contest a living trust than a will.
  • Disability: If you should become disabled through a stroke, senility or some other form of mental incompetence, you avoid a court-appointed guardian if you have a revocable living trust. With a trust, one of your trustees can step in to manage your affairs until you recover. With a will, the person the court appoints to manage your affairs may not be the person you would choose. In addition, the process of appointing a guardian is both lengthy and costly.
  • Out-of-State Properties: A living trust is valid in all states so if you move, you don’t need to change it to comply with new state laws. In addition, any property owned in more than one state avoids probate. With only a will, you would have to start probate in every state in which you owned property.
  • Continuation of Business: When you transfer your assets of a business into a living trust, a trustee can step in and continue to manage the business, which is often a needed source of income for the family should you become disabled or upon your death. There is no disruption in operation.

Disadvantages

  • No Income Tax Savings: A living trust neither avoids nor saves any taxes while you are alive. You will be taxed on all the income the trust earns. During your life, you will file these taxes as part of your personal tax return. After you die, the trust will pay taxes as its own entity on any income to the trust over $600 and generally at a higher rate than you paid as an individual.
  • No Automatic Estate Tax Savings: Should your estate exceed the value of the unified credit ($1 million in 2002), you will owe federal estate taxes on both probate and non-probate assets. If this describes your situation, you may want to consult a tax professional to discuss reducing your tax liability.
  •  More Complex and Expensive Than a Will: A lawyer will charge you more to create a living trust than a will (about $3000 vs. $750) so it is initially more costly to set up. Trust “funding”, the process by which your assets are transferred into the trust, can be time consuming if you take care of this step yourself.
  • No Deadline of Claims for Creditors: Probate imposes a limit on the time that creditors may presents bills to your executor while a trust does not fall under the same guidelines. Thus a possibility exists that a creditor could sue a trust or its beneficiaries for money after your death, even after the trust ends.
  • Does Not Avoid Creditor Claims During Your Life: If you maintain control over your assets in a trust, the courts could force you to pay your creditors with assets from your trust. If you set up a trust to avoid paying creditors, the courts will consider the transfer of assets fraudulent and you could incur a fine in addition to having to pay the creditor.
  • May Not Eliminate the Need For a Will: If you had any last minute assets that were not transferred to your trust, these assets would need a “Pour-Over Will” to provide for transferring them to the trust. The Pour-Over Will would be filed with the court upon your death, like a standard Will.